Arbitrage-free affine models of the forward price of foreign currency
Forward foreign exchange contracts embed not only expected depreciation but also a sizable premium, which complicates inferences about anticipated returns. This study derives arbitrage-free affine forward currency models (AFCMs) with closed-form expressions for both unobservable variables. Model calibration to forward term structures of eleven U.S.-dollar currency pairs from the mid-to-late 1990s through early 2014 fits the data closely and suggests that the premium is indeed nonzero and variable, but not to the degree implied by previous econometric studies.
The global implications of diverging monetary policy settings in advanced economies
Panel Remarks at the Sixth High Level Conference on the International Monetary System: Monetary Policy Challenges in a Changing World, Zurich, Switzerland.
Towards Increasing Complexity: The Evolution of the FX Market
The foreign exchange market has evolved extensively over time, undergoing important shifts in the types of market participants and the mix of instruments traded, within a trading ecosystem that has become increasingly complex. In this post, we discuss fundamental changes in this market over the past twenty-five years and highlight some of the implications for its future evolution. Our analysis suggests that maintaining a healthy price discovery process and fostering a level playing field among participants are areas to watch for challenges. The consequences of the evolution of the FX ...
The FX Global Code: Progress Made and The Path Ahead
Remarks at FX Markets USA, New York City.
The pricing of FX forward contracts: micro evidence from banks’ dollar hedging
We use transaction-level data on foreign exchange (FX) forward contracts for the period 2014 through 2016 in conjunction with supervisory balance sheet information to study the drivers of banks? dollar hedging costs. Comparing contracts of the same maturity that are initiated during the same hour of the same day, we find large heterogeneity in banks? hedging costs. We show that these costs (i) are higher for banks with a larger FX funding gap, (ii) depend on banks? FX funding composition in terms of the source (interbank versus retail) and rollover structure (long-term versus short-term), ...
Warehousing: A Historical Lesson in Central Bank Independence
This Economic Commentary explains how warehousing?a seemingly innocuous institutional arrangement between the Federal Reserve and the US Treasury?came to threaten the Fed?s independence. Warehousing began as an arcane procedure designed to help the Treasury cover a specific type of foreign-exchange exposure. It then grew into a supplemental source of funding for the Treasury's foreign-exchange interventions. Eventually the procedure morphed into a sizeable off-budget source of funding for other Treasury activities and seemed an inappropriate subversion of the congressional appropriations ...
The role of direct flights in trade costs
The role of direct flights in trade costs is investigated by introducing and using a micro price data set on 49 goods across 433 international cities covering 114 countries. It is shown that having at least one direct flight reduces trade costs by about 1,400 miles in distance equivalent terms, while an international border increases trade costs by about 14,907 miles; hence, the positive effects of having at least one direct flight between any two cities can compensate for about 10% of the negative effects of an average international border. Trade costs also decrease with the number of direct ...
The Turnaround in Private and Public Financial Outflows from China
China lends to the rest of the world because it saves much more than it needs to fund its high level of physical investment spending. For years, the public sector accounted for this lending through the Chinese central bank’s purchase of foreign assets, but this changed in 2015. The country still had substantial net financial outflows, but unlike in previous years, more private money was pouring out of China than was flowing in. This shift in private sector behavior forced the central bank to sell foreign assets so that the sum of net private and public outflows would equal the saving ...
The Fed's Foray Into Forex
Although very uncommon now, the Fed used to intervene regularly in foreign exchange markets
Remarks at the Next Step FX Event
Remarks at the Next Step FX Event, New York City.